Oil climbs 3%, tallies weekly loss

Impact of yuan-dollar peg's removal on demand at issue

SAN FRANCISCO (MarketWatch) -- Crude futures closed 3% higher Friday, but after retreating over the past two sessions prices posted a loss for the week as investors debated whether China's revaluation of the yuan will lift demand for oil.

The Chinese government said Thursday it will drop its yuan-dollar peg in favor of one measured against a basket of currencies. See full story.

"Traders are worried that China's appetite for commodities may increase due to a stronger Chinese currency," said Michael Armbruster, an analyst at Altavest Worldwide Trading.

Crude for September delivery closed at $58.65 a barrel on the New York Mercantile Exchange, up $1.52 for the session, down 48 cents, or 0.8%, for the week. Prices lost $1.56 over the previous two days to close Thursday at their lowest in a month.

August unleaded gasoline climbed 4.7 cents to end at $1.728 a gallon, up from last Friday's close of $1.6883. August heating oil closed at $1.5819 a gallon, up 1.3 cents, but down from last week's $1.6621 close.

One interpretation of the yuan move "concludes that the peg to a basket of currencies, instead of the dollar, will increase energy-demand growth as a consequence of a weakening greenback," said Michael Fitzpatrick, an analyst at Fimat USA.

On the other hand, another analysis reveals that "the revaluation could weaken China's competitiveness ... and ultimately slow its appetite for oil," he said in a daily note to clients.

Indeed, James Williams, an economist at WTRG Economics, believes the move, in the long run, will be "negative for crude as the stronger yuan would eventually raise the price of exports of goods to the U.S."

"That would slow the growth in the Chinese economy, decrease the demand for crude and have a negative impact on oil prices," he said.

The yuan was as strengthened by 2% against the dollar. That makes the price of crude actually 2% less for Chinese refiners -- meaning that the price of crude for the Chinese would be the equivalent of a dollar or so lower, Williams said.

That's "hardly enough to have an impact on demand in any significant way," he said.

Summed up, "as far as oil prices, I don't think this very small revaluation is a significant event," he said.

Market jitters

Overall, the oil market "has certainly seen a series of negative demand forecasts recently, managed to dodge two hurricanes and also has seen the generation of tropical storms slow markedly," said Fitzpatrick.

"With apparently adequate supply on hand to meet peak fuel demand later this year, there is little compelling reason to buy right now," he said.

Still, if prices don't "break emphatically lower soon, at least to the early summer lows, a slow grind higher into the fall is a distinct possibility," he said.

He attributed his forecast for a potential climb to the "refusal of the global economy to break down despite higher and higher energy prices over the past two years."

The "jittery" oil market is just looking for a direction, said Williams, adding: "all fundamentals -- except the lack of surplus production capacity -- are pointing down."

"The question for the market is whether that lack of spare capacity justifies prices over $15 higher than a year ago when inventories were in worse shape, and the lack of surplus capacity was about the same," he said.

Storm watch

It's also important to remember "there is a very high risk premium for a possible oil-export interruption and potential hurricane damage later in the season," Williams said.

In the Atlantic, tropical storm Franklin is moving northward away from the northwestern Bahamas, according to the National Hurricane Center.

Some seem to see a risk from the storm, but "it's hard to see it making a turn into the Gulf" where the bulk of the offshore U.S. oil and natural-gas facilities are located, said Williams.

Agbeli Ameko, a managing partner at First Enercast Financial agreed. "Franklin isn't a threat at all to the energy markets," he said, adding that it's headed east of the coast of Florida and will turn northeast out to sea.

For now, facilities in the Gulf of Mexico have been steadily recovering from the shutdowns caused nearly a week ago by Hurricane Emily. About 0.5% of daily oil output and 1.1% of daily natural-gas production in the region remained shut Friday, according the latest U.S. Minerals Management Service report, and all the evacuated rigs and platforms have been remanned.

In other news Friday, London police confirmed that they killed a man at a subway station in south London. News reports indicated that the man was a suspected bomber. See full story.

Some traders tied the bounce in price to the shooting, "although it is hard to see exactly why that would have a material impact on an overall sense of security," said Tim Evans, a senior analyst at IFR Markets, in a note to clients.

Inventory reports from the Energy Department and American Petroleum Institute issued Wednesday showed declines in both crude and gasoline supplies for the week ended July 15.

But traders were disappointed with the 900,000-barrel decline in the government's report, which was well below market expectations. See full story.

Natural gas rises

Elsewhere on the energy-futures market, natural-gas prices climbed, recovering part of Thursday's loss but still ending the week almost 6% lower.

"The effect of the ongoing heat [in parts of the U.S.] will generate enough air-conditioning demand to keep prices from retreating, despite ample storage," said Fimat's Fitzpatrick.

August natural gas closed up 8.4 cents at $7.384 per million British thermal units. It closed near a three-week low on Thursday. A week ago, prices closed at $7.849.

On Thursday, the Energy Department said U.S. natural-gas stocks rose 59 billion cubic feet for the week ended July 15, meeting some market expectations. Total stocks stand at 2.339 trillion cubic feet, up 122 billion cubic feet from the year-ago level, the government data said.

On the equities side, shares of oil companies rose, with the Philadelphia Oil Service Index
OSX, -2.38%
reflecting strength in oil services following a spate of quarterly earnings reports. See Energy Stocks.

And in metals futures, the benchmark gold contract fell, but marked a gain for the week. See Metals Stocks.

As for the Reuters/Jefferies CRB Index, the broad measure of commodity futures markets stood at 303.4 points, up 0.9% on the New York Board of Trade.

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